FOOL'S EYE VIEW
Your Easy Guide To Cheaper Borrowing

By Cliff D'Arcy
July 28, 2005

As I've said many times in the past, the UK has become a nation of credit addicts.

In fact, at the end of May 2005, we owed £910 billion to mortgage lenders, plus another £189 billion on credit and store cards, personal loans and overdrafts. Divided equally among the UK's 47 million adults, this burden comes to about £23,400 per person. When this government came to power in May 1997, our total debt amounted to about £10,600 per person, so it has more than doubled in just eight years. Blimey!

What's more, at an average annual rate of, say, 5½%, our mortgage debt costs us around £50 billion a year in interest alone. At an average rate of, say, just over 13%, our other debt costs us a further £25 billion a year. This massive interest bill gobbles up close to a tenth of our take-home pay!

These days, when I borrow money, I pay little or no interest for the privilege. However, I had to learn the hard way - it took me many hard years to learn the lesson that it's far better to earn interest than to pay it! So, without further ado, here are a few tips to help you pay less interest and yet get more when you borrow.

Personal loans

When it comes to shopping around for an unsecured personal loan (don't get a secured loan, because it puts your house on the line!), there are three core rules:

1. Forget about comparing interest rates (known as APRs, or Annual Percentage Rates), because these can be misleading. Instead, compare the TAR (Total Amount Repayable), which is an accurate figure of how much you will pay back.

2. Don't visit your bank, because the high street is the worst place to get a personal loan. If you want to pay as much interest as possible, go to your bank - if you want to pay the least, look at the Best Buy tables and shop around online.

3. Steer clear of add-ons and gimmicks, especially payment protection insurance (PPI). As I explained in this article, PPI typically increases your monthly repayments by between 15% and 25%. That's a steep price to pay for so-called "peace of mind"!

For even more tips on choosing the loan that's right for you, read Personal Loans Without Moans Or Groans. Now let's look at current Best Buys loans - without PPI, naturally!

To borrow £5,000 over three years:

Lender	TAR (£)	Typical APR (%)
Giraffe Loans	5,432	5.6
moneyback bank Apply via the Fool	5,439	5.7
Barclaycard	5,440	5.7
Northern Rock Apply via the Fool	5,440	5.7
Cahoot Apply via the Fool	5,448	5.8

These rates apply to online applications, except
for Giraffe Loans, which has a telephone-only
application process.

To borrow £10,000 over five years

Lender	TAR (£)	Typical APR (%)
moneyback bank Apply via the Fool	11,474	5.7
Barclaycard	11,476	5.7
Northern Rock Apply via the Fool	11,476	5.7
Cahoot Apply via the Fool	11,503	5.8
Post Office	11,503	5.8

All the above are for online applications.

Many of these loans are available via the Fool. Check them out in our Personal Loan centre.

Credit cards

Although there are around 72 million credit cards in issue around the UK, I'm willing to bet that the vast majority of cardholders don't have the right card to match their spending and repayment pattern. As with most financial products, it pays to switch, because card firms save their best deals for new, not existing, customers!

Full payers

The key question to answer is: "Do you pay off your entire balance each and every month, without fail?" If you fall into this category - and roughly half of all cardholders do - then it's possible to make a profit from using credit cards! Your strategy is simple:

1. Take advantage of the standard interest-free period which your card offers. If you buy something just as your latest monthly statement is produced, you will be given between 45 and 59 days to pay for these goods. By making big transactions just after your statement date, you maximise your time to repay.

2. As I explained in this article, it's easy to earn cashback as you spend. By putting all your spending on a cashback credit card, you can receive up to 2% back on every purchase. I recently opened a new cashback card for myself and my wife and, for the next few months, all our spending will be made on this card. In the first month, we earned about £12, which will be credited to our account next year. What's more, you can "double up" by using a cashback credit card alongside a loyalty card (such as the Nectar Card, Tesco Clubcard or Boots Advantage Card) for extra rewards and perks!

You'll find several Best Buy cashback cards in our new, improved Credit Card centre.

3. Using your credit card to finance major purchases makes good sense, because you enjoy extra legal protection if the goods fail to arrive or are faulty - this article explains how. For example, the UK's largest computer maker, Tiny Computers, went bust earlier this week. Customers who paid by cash, cheque or debit card and have not received their PCs are unlikely to receive any compensation. However, credit-card customers can reclaim their loss from their card companies. This is a benefit well worth having!

Everyone else

If you don't pay off your bill in full every month, you will pay interest (boo!). So, the interest rate charged by your card is important. You could choose a card with a low standard interest rate; although most credit cards charge annual rates of between 15% APR and 25% APR, Best Buy standard rates are between 6.9% APR and 10.7% APR for the six cheapest cards.

However, with a little effort, you don't have to pay a single penny in interest, even if you only pay the minimum monthly repayments on your card! All you need to do is apply for and use a "0% on purchases card" - one which charges no interest for an extended introductory period. There are dozens of 0% cards to choose from, with introductory offers ranging from five, six or nine months, with one card offer a whole year's interest-free spending!

When your 0% deal is coming to an end, transfer your remaining balance to a "0% on balance transfers" card, and you can enjoy an even longer interest-free period. Congratulations: you've joined the ranks of the "rate tarts"! Learn more about 0% cards in From 30% To 0% In Sixty Seconds!

Don't forget that you can get a cracking 0% card in our new, improved Credit Card centre!

Store cards

Let me tell you why I call store cards "the Devil's debt". According to Moneyfacts, only three store cards charge annual interest rates of less than 19% APR. They are IKEA Home (12.9% APR), John Lewis (14% APR) and Marks & Spencer Money (18.9% APR).

All other store cards charge between 25.9% APR and 30.9% APR, making them the most expensive mainstream way to borrow money. The Bank of England's base rate is currently 4.75% a year, so most store cards charge six to seven times as much as the base rate. By all means, use your store cards to claim discounts, loyalty points or for cardholder offers or special events. However, never borrow money on them - always repay your bill in full every time!

Overdrafts

In the days when my finances were out of control, I used to slip into the red all the time. The worst thing was when I exceeded my credit limit, because my bank would happily slap a load of hefty charges onto my account. As I explained in Overdrafts From Hell!, banks make around £3 billion a year from these punitive charges for unauthorised overdrafts. Grrrr!

These days, I'm very careful not to go overdrawn, partly as a matter of pride. In fact, I haven't been overdraft for more than two years, which tickles me. Admittedly, with two days to go until payday this month, I have less than a quid left, but that's still better than actually being overdrawn!

If you find yourself being charged a fortune in overdraft interest and charges, it's probably worth your while switching to another account (or learning how to budget better!). Here's the latest list of the Best Buy overdrafts (according to Moneyfacts):

Bank	Account name	Interest rate
Alliance & Leicester Apply via the Fool	Premier Current (£500pm)	0% for a year on up to £2,500, then 7.9% EAR
Nationwide BS Apply via the Fool	FlexAccount	7.75% EAR (24.9% EAR for unauthorised)
Yorkshire Bank	Current Account Plus	8.29% EAR (31.37% EAR for unauthorised)
Norwich & Peterborough BS	Gold Current (£500pm)	8.8% EAR (24.9% EAR for unauthorised)
Intelligent Finance	Current	9.8% EAR (25% EAR for unauthorised)

You can apply for the Alliance & Leicester and Nationwide BS current accounts (and six other top accounts) via the Fool.

I hope this advice helps you to slash your interest bill. Make a start on dynamiting your debts today!

More: Find a better personal loan, credit card and bank account | Get Out of Debt centre.